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When the results of the financial study, which we recommended should be carried out by anyone finding themselves getting into worrying debt, have been analysed and reveals that there is no obvious way in which to release you from the burden of debt, then perhaps making contact with an approved debt management company might provide a way forward.
What might they do?
Where you have a number of unsecured debts that are unaffordable to you, they may be able to arrange to have some of your debt reduced and then rearrange your repayments into a single affordable monthly payment. This is often done via a trust deed.
Trust Deeds
A Trust Deed is a legal agreement which is set up between you the borrower and your your unsecured creditors. What this can do is allow you to only repay what you can reasonably afford, spread over a fixed period of time. Instead of making payments to each of your creditors, you will make a single affordable monthly payment which is then divided between your unsecured creditors.
It is common for these payments to last for up to five years, depending on the level of debt involved, but during that time all interest and fees will be frozen. When the trust deed ends, any remaining debt is written off.
Types of debt covered by a DMP
Only certain types of debts can be included in a DMP which are termed as non-priority debts. Examples of these are shown below:
- Bank overdrafts – These are high interest charging arrangements set up with your bank to let you continue to make payments when your account reaches zero. They have set limits that apply.
- Personal loans – These are unsecured personal loans arranged with friends, your bank or building society or other short term unsecured lenders.
- Credit card debt – These are usually high interest bearing debts and include store card debts and payday loans
- Catalogue debt – These are the build up of debts through purchases of items bought through catalogues or other on-line shopping arrangements.
Debts not covered by a DMP
The debts that cant be included in a DMP are those debts which are termed priority debts. Examples of these are shown below:
- Court Fines – These include any types of fines or orders that have been issued by the courts.
- TV Licence – As this is a license fee, it cannot be classed as debt. If unpaid, court action could follow.
- Council Tax – This is the tax on property which supports councils and if you own or rent your home, it must be paid. If you qualify for benefits, these may be covered by that.
- Gas and Electricity charges – These are essential items which are charged for as they are used. If you qualify for benefits, these may be covered by that.
- Child support and maintenance – These payments are generally set out by court order and cannot be treated as a debt to be cancelled.
- Income Tax, National Insurance and VAT – these are taxes collected by HMRC and cannot be cancelled.
- Mortgages, Rent or Loans that are secured against your home – Debts secured on your home cannot be cancelled and if not paid could result in either having your home repossessed or if renting, facing eviction.
- Hire purchase agreements – Where the item purchased is considered essential, then the debt cannot be included in a DMP.
DMP Regulation
It is important to be aware that all Debt Management Plan (DMP) providers must follow the rules and guidance set out by the Financial Conduct Authority (FCA). These apply to anyone providing debt management services, whether or not they are charging you for their services.
There are certain minimum standards that all the authorised firms are expected to meet, including:
- Not misleading you – DMP providers must not mislead their customers through any advertising, marketing or promotions they do, which includes things such as ensuring their communications are accurate and easy to read, refraining from making misleading statements and not claiming to be acting on behalf of Government.
- Transparency on fees – Should fees be charged, then the DMP provider must set out what these will be before you agree to go ahead. As their fees may increase the time for you to be debt free, they must also explain how any fees you pay will affect the length of your DMP and the total amount you’ll have to pay.
Providing the information you need
Before signing a contract with a DMP provider, there are certain things they must provide to you, such as:
- information about how the service will work.
- your right to cancel
- how much you’ll repay.
- how long the DMP will last.
- explain in writing, the risks of a DMP, including that your creditors might still take action against you or refuse to co-operate.
Your credit rating and DMP
Although a DMP can have great benefits, there are a number of risks that should be carefully considered before entering into a DMP.
A key one is likely to be your future credit rating, as the payment you make each month through the DMP will usually be less than the minimum amount you initially agreed upon when you first out the debt.
Even when your your creditors are happy to accept the DMP, the fact that you are not paying the full amount will likely appear on your credit file and lower your credit rating. However, once each debt has been cleared, they should eventually be removed from your credit file.
Interest and Charges
Once the DMP has started, most creditors will have agreed to stop all interest and charges but some may not. This will not stop the DMP going ahead but some adjustment may be required.
Debt collection and court action
Creditors who don’t agree to your DMP can still take further action against you. For example, they can pass your debt to a collection agency or start court action, and they may continue to contact you.